New Landscape of Medical Devices: Global Giants Stagnate While Chinese Leaders Rise

On November 20, the medical device sector continued to decline by 0.37%. Since August, the medical device sector has overall declined by 14.45% after a significant rise earlier, and individual stocks have also shown divergence.

If we look at a two-year dimension, this may be a technical correction for the medical device sector. For the Chinese stock market, which has traditionally favored the trends of drinking and medication, the concept of medicine is extending from pharmaceutical manufacturing to medical devices.

In fact, the medical device industry not only represents high-quality development and high-level profitability but also bears the heavy responsibility of 'taking people from the jaws of major diseases.' If life is a race against time and technology, then the medical device industry is a super track concerning life.

It is worth mentioning that although the leading medical device company Mindray has seen a short-term correction, its stock price has only declined by 2% during these three months of correction in the medical device sector.

In fact, after a cumulative increase of 189% in the medical device sector over the past two years, the institutions have shown short-term divergence, making the brief correction completely understandable. However, when we review the growth pattern of the global medical device industry, we will still see that 'the scenery here in China is uniquely beautiful.'

In this super track of medical devices, since 2016, the global medical device market has stabilized, with a growth rate around 5%, and major giants are experiencing sluggish growth. In contrast, the domestic market is thriving, with a year-on-year growth of over 15%, and there are still good growth expectations for the next 5 to 10 years. It can be said that the development of the global medical device industry looks to China. This will also accelerate the rise of leading companies in China's medical device industry, even hastening their emergence in the global competition.

Global stability: sluggish giants

In recent years, the global economy has shown sluggish growth, yet the medical device industry has managed to maintain steady growth.

As an industry benchmark, market size holds significant reference value. According to a report by iiMedia Consulting, in the past year of 2019, the global medical device industry reached a scale of $451.9 billion, with a year-on-year growth of 5.33%. It is expected that the market size will reach $477.4 billion in 2020, entering a phase of steady development.

This expectation is well-founded. Since 2016, the global medical device market size has been continuously increasing, with a year-on-year growth rate fluctuating around 5%. In the global market, the United States holds the largest market share, accounting for over 40%, while China accounts for about 18%, leaving significant room for development.

The global market is developing steadily, while international giants are entering a bottleneck of sluggish growth. For example, the world's number one Medtronic saw its revenue grow from $29.7 billion in 2017 to $30.5 billion in 2019, with a cumulative growth of only 2.7% and a very low compound growth rate. Similarly, Johnson & Johnson, Philips, and GE Healthcare, ranked 2-4, had growth rates of only 1.9%, 6.5%, and 3.1% in 2019, respectively.

Looking at the other companies in the top 10 rankings of 2019, there are also some giants with rapid growth, but the fluctuations are significant. Throughout the years, aside from Medtronic, Johnson & Johnson, and Philips, which have long dominated the rankings, the positions of other giants are not stable, showing characteristics of 'jumping up and down,' thus making the reference value of significant growth cases quite limited.

It is important to note that the sluggish growth of medical device giants does not mean a decline in their dominance in the medical device market. Data from 2017 indicated that the top 10 medical device companies globally held 37% of the market share, while the top 30 held 63%. The market concentration is quite high.

The dominance of medical device giants is still strengthening. A set of data from the Forward Industry Research Institute shows that in 2016, the top 20 domestic medical device companies had a cumulative R&D investment of $340 million, averaging 4.51% of their revenue. In that year, Medtronic alone had R&D expenses of $2.2 billion, accounting for 7.7% of its revenue.

The gap in investment has led to a gap in strength to some extent. Currently, in the domestic mid-to-high-end medical device market, the import ratio of CT machines, ultrasound instruments, testing instruments, MRI equipment, ECG machines, mid-to-high-end monitors, and high-end physiological recorders accounts for about 80%-90%. At the same time, about 70% of the high-end medical device market is occupied by foreign capital.

This illustrates a principle: the global medical device market is growing steadily, and no country's enterprises can sit back and enjoy the benefits. To surpass the sluggish international giants, both domestic policy support and the technological R&D strength of enterprises are needed. From these two aspects, the Chinese market has the greatest opportunity to cultivate world giants.

Looking to the future: how much growth potential is there?

Since 2015, the scale of China's medical device market has gradually expanded. In 2019, the market size grew by 18.5% year-on-year to 628.5 billion yuan, and it is expected to reach 734.1 billion yuan in 2020, with a growth rate of 16.8%. From the growth data, it is evident that the Chinese medical device market indeed has 'better scenery here.'

The growth of China's medical device market is not a fleeting phenomenon. Some institutions predict that the domestic medical device market is expected to exceed one trillion yuan by 2022. The rapid development of the Chinese market is inseparable from the push of favorable policies, as well as the enhancement of economic development and social demand.

In terms of policy, the 13th Five-Year Plan, the 'Healthy China 2030' planning outline, 'Made in China 2025,' and the '13th Five-Year' health and health technology innovation special plan, all propose to vigorously promote the development of medical devices, specifically to enhance quality, reduce import dependence, and lower medical costs.

Medical system reform has also driven the significant development of the medical device industry. The upgrading of medical devices in various health institutions brought about by hierarchical diagnosis and treatment has created a huge demand for medical device products. Mindray Medical's chairman, Li Xiting, once judged that the domestic medical device industry has entered a 'golden decade.'

The pandemic in 2020 has further changed the public's consumption concept regarding medical devices, with increasing calls for domestic substitution in the medical device industry. During the pandemic, the demand for low-value consumables such as masks and protective clothing surged, while diagnostic reagents and life monitoring and support systems were in short supply, exposing shortcomings in the capacity of China's medical device industry to ensure high-end medical equipment.

Under policy guidance, companies like Mindray Medical have been working overtime to provide strong support for the supply of key medical equipment such as ventilators. In the post-pandemic era, the medical device industry is shifting from the mid-to-low-end market to high-end market imports, becoming the main theme of development. Chinese medical device companies have also demonstrated strength that surpasses the notion that 'foreign monks can chant scriptures.'

Currently, domestic medical devices have made several breakthroughs in overcoming technical barriers, achieving import substitution, such as cardiovascular stents, heart occluders, artificial dura mater, trauma and spinal products in orthopedic implants; and monitors and DR in medium and large medical equipment.

All signs indicate that the development of the global medical device industry has entered 'Chinese time.' This trend relies on the comprehensive strength of a country's economic rise and technological innovation, and the pattern is unlikely to change for a considerable period.

The new leaders in medical devices and the resurgence of Mindray.

The significant development of an industry will inevitably lead to the rise of a leading player. In the process of the medical device industry experiencing significant growth over the past 5 to 10 years, a leader will certainly emerge. The development of the domestic medical device market reflects the global market, highlighting the Matthew effect, transitioning from a competitive landscape to a stage of 'one strong player and many strong players.'

The 'one strong player' refers to Mindray Medical, which has a revenue of over 10 billion, while 'many strong players' refers to listed companies like New Horizon Medical, Lepu Medical, RunDa Medical, Yuyue Medical, and MicroPort Medical, which are part of the 1 billion club. In terms of revenue and net profit, Mindray Medical stands out distinctly.

Specifically, in the first three quarters, Mindray's revenue reached 16.06 billion yuan, which is the sum of the second and third places, Yingke Medical and Zhendai Medical, and also the sum of the sixth, seventh, and eighth places, New Horizon Medical, Lepu Medical, and Yuyue Medical. In terms of net profit, Mindray Medical's 5.3 billion yuan exceeds the second place, Yingke Medical, by 1 billion yuan, and surpasses the combined total of the third and fourth places, BGI and Zhendai Medical.

From the performance data alone, Mindray Medical is the one carrying the global PK banner for Chinese medical device companies. Why Mindray Medical? Can Mindray Medical continue to lead?

Technological innovation is the driving force behind a company's development. Since its establishment in 1991, independent innovation has been part of Mindray Medical's DNA. In terms of independent research and development and technological innovation, Mindray Medical is one of the Chinese medical device companies with the highest investment and also one of the companies with the most technological patents in medical equipment.

In the first three quarters of 2020, Mindray Medical's R&D investment reached 1.508 billion yuan, a year-on-year increase of 25.64%. In recent years, Mindray Medical's overall R&D investment has consistently maintained around 10% of its revenue. The substantial R&D investment has yielded significant results.

It is reported that Mindray Medical can launch more than 10 new products each year, with an average of at least 10 patented technologies applied in each new product, continuously redefining new standards for medical quality and efficiency.

Industry insiders say that Mindray Medical has long focused on independent R&D, continuously enriching its product offerings, and achieving breakthroughs in mid-to-high-end products. It is expected to further enhance its global competitiveness against the backdrop of high-end market import substitution, expansion of grassroots markets, and rapid development of private hospitals. This external evaluation aligns with Li Xiting's judgment.

During the pandemic, the elite medical teams from across the country gathered in Wuhan. Li Xiting believes that after using Mindray's monitors, ventilators, infusion pumps, mobile DR, and other equipment, experts from major hospitals have gained a deeper understanding of domestic brands. Mindray's product performance is already on par with imported brands, and even excels in areas such as information technology and intelligent product innovation.

The acceleration of import substitution presents a rare opportunity for the entire Chinese medical device team at Mindray Medical: domestic brands, possessing core technologies and achieving clinical results consistent with imported equipment, will have more opportunities for competition on the same stage, promoting a fair, just, and transparent procurement process, allowing high-quality, high-performance domestic equipment to truly enter major hospitals.

Currently, China has launched a strategic emergency material reserve project (including ventilators, monitors, etc.) and new medical infrastructure. Mindray Medical's monitors, ventilators, anesthesia machines, chemiluminescence, ultrasound, and other main products have been included in the list of excellent domestic medical devices, which will benefit from domestic substitution in the long term.

Looking at the global market, Mindray Medical has also made significant strides. Since its internationalization strategy began in 2000, Mindray Medical's products have been exported to over 190 countries and regions, with subsidiaries in more than 30 countries abroad, and it has become a long-term partner of leading medical institutions in the United States, the United Kingdom, Germany, France, and other countries.

Based on the judgment that the medical device industry is entering a 'golden decade,' Li Xiting has set a goal of entering the top 20 in the international market within ten years, and taking a longer time to enter the top 10. For Mindray Medical, which has just entered the global ranking competition, it is currently ranked 34th. The top 20 globally have revenues of about 10 billion USD, which means several times of growth potential for Mindray Medical.

The global medical device industry looks to China, and the Chinese medical device industry looks to Mindray. Whether driven by policy or consumer market promotion, we have reason to believe that Mindray Medical can continuously produce high-end products with excellent cost performance through technological iteration, carrying the banner of Chinese enterprises in global competition.